Do you feel like the “crypto universe” is a bit, well, cryptic?
You’re not alone. Cryptocurrencies, digital coins, digital wallets – these are some of the terms used to describe these rapidly evolving and often volatile types of investments. And there is even more information online to sift through when trying to figure out what it all means.
We can help. In this article we’ll demystify the basics of crypto-assets, including how they’re bought and sold, and key risks you should take into consideration if you’re thinking of investing in them.
What Are Crypto-assets?
Crypto-assets are a type of digital asset which use cryptography, peer-to-peer networking, and a public ledger to create new , and verify and secure transactions without a middleman or central bank. Crypto-assets often have one or more of the following properties:
- A medium of exchange (similar to fiat currencies);
- A function that is specific to the business or issuer; or
- An ownership or profit interest in a business .
Many people use the term “cryptocurrencies” when referring to crypto-assets. However, while many crypto-assets are digital mediums of exchange (and therefore act similar to currencies), not everything that is referred to as a cryptocurrency is a digital medium of exchange, but could be a crypto-asset with other properties.
In this article, we use “cryptocurrency” to mean those crypto-assets that act as digital mediums of exchange.
Common Types of Cryptocurrencies
The field of cryptocurrencies is constantly expanding – as of January 2021, there are more than 4,000 cryptocurrencies that exist! While it would be difficult to list them all, there are some digital currencies that are fairly well-known now.
Bitcoin is often referred to as the cryptocurrency trend-setter. Mainstream financial publications post its price ticker on their websites, and it is the cryptocurrency that is talked about most in the news media. Since interest in Bitcoin took off a few years ago, there is more discussion around other cryptocurrencies like Litecoin, Ethereum, Bitcoin Cash, and others.
Risk Associated with Crypto-assets
Generally, it can be difficult for people to find a marketplace where they can buy and sell their holdings easily at a consistent price. There are also liquidity, security and volatility risks associated with crypto-assets, which can contribute to large price fluctuations.
Furthermore, crypto-assets are created and circulated online. Companies and individuals may remain anonymous, easily mask their identity, or reside outside of the jurisdiction where you purchased the asset. Not knowing who is responsible to you and your investments, can make it difficult for you to pursue them legally if you have an issue with a crypo-asset offering.
Finally, no crypto-asset is guaranteed. You could lose all of the money you used to purchase the crypto-asset.
How Crypto-assets are Bought and Sold
There are many ways that you can buy, sell, and store crypto-assets. For instance, you can buy crypto-assets directly (e.g. in a peer-to-peer or P2P manner), and you can hold them in digital wallets that you maintain sole access to. Digital wallets are encrypted with a password, and that may lead to a greater sense of security for investors; however, there have been instances where people have forgotten their passwords or deleted their wallets, and locked themselves out of accessing their invested dollars. As well, depending on how secure your wallet or your password is, there is the possibility that either can be hacked, and the hacker can gain access to the crypto-assets stored within.
Crypto-assets are also available through trading platforms, Initial Coin Offerings (ICOs), Initial Token Offerings (ITOs), and investment funds. These are all described later in this article.
Many crypto-assets and online trading platforms aren’t currently regulated, which means that the purchase, transfer, and sale of them falls outside the protections that securities regulators can provide. For example, because crypto-assets can trade in a number of ways at all hours, it may be difficult to establish whether you are buying or selling crypto-assets at a fair price. Regardless of how you choose to buy and hold crypto-assets, keep in mind that it can be difficult to pull your money out.
Crypto-asset Trading Platforms
Online crypto-asset platforms, apps and exchanges (trading platforms) allow people to buy and sell crypto-assets without needing to transact in a P2P fashion. As discussed above, it’s important to know that crypto-asset trading platforms are often unregulated. As such, key investor protections may be missing from these trading platforms, including secure handling of client funds, safekeeping of assets, protection of personal information, pre-trade disclosures, measures against market manipulations or unfair trading, and other harmful practices.
The CSA has urged Canadians to be cautious when considering buying crypto assets through trading platforms.
Remember, if a trading platform facilitates the trading of, or interests in crypto-assets that are securities or derivatives, that trading platform must comply with securities legislation. If you come across a trading platform that you suspect is operating illegally, report it to the BCSC immediately.
If you are curious about whether a trading platform is registered with a securities regulator or recognized as a securities or derivatives marketplace or exchange, a good first step would be to contact a securities regulator and inquire. If you’d like to get in touch with someone at the BC Securities Commission, you can find our contact information here.
If a platform is registered or recognized, it will be subject to requirements regarding their operations, management of risk (including employing adequate measures for security), and custodians they use for holding client assets. As well, it will be subject to dealing honestly, fairly and in good faith with their clients, including when they are trading on behalf of their clients.
You can check to see if a platform is registered by going to AreTheyRegistered.ca. This national search tool can help you check registration, search for disciplinary actions, and find investment advisors by province.
Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs)
ICOs and ITOs are relatively new ways for companies to raise capital by offering crypto-assets – often structured as tokens or coins.
There are various risks when buying into ICOs, including the following:
- Many ICOs are startup concepts that have no businesses or operations behind them.
- If the offering is not subject to securities regulations, there are no disclosure requirements and that can complicate your ability to evaluate the offering.
- It may be difficult or impossible to get a full picture of the purposes of the ICO before you invest.
- The value of coins and tokens in the ICO can be speculative. The value can go up and down drastically, and the purpose of the coin may never happen.
Cryptocurrencies are also available through cryptocurrency investment funds – funds which give investors access to cryptocurrencies without owning the coins directly. Cryptocurrency investment funds are susceptible to risks related to the cryptocurrency it invests in like market volatility, cyberattacks, limited regulation, and an underlying reliance on technology. These funds need to be managed by registered investment fund managers, or obtain exemptions from such registration, to do business in Canada.
It’s also important to note that cryptocurrency investment funds offered to BC investors need to comply with BC laws. If the fund is private, it may not be accessible to retail investors unless they qualify for an exemption.
Crypto-asset Related Investment Scams
The volatile and often unregulated nature of crypto-assets means that investors could fall victim to investment fraud in a number of ways. For instance, a fraudster may claim that they will use your money to buy digital currencies, and then cut off all communication once you have sent them your funds. Scams could include fake investment products, false websites claiming to sell packaged investments, and fraudulent cryptocurrency exchanges. Learn more about common characteristics of a crypto-related scam.
In September 2020, the BCSC warned investors about fake websites offering packaged cryptocurrency or forex products. Watch the video to learn more about what these websites can look like, and how to spot the warning signs of investment fraud.
Be an Informed Investor and Seek Help
When considering any investment, you should:
- Read documentation about an investment offering to understand how the type of investment will be valued and used; and
- Consider consulting a registered investment advisor when making investment decisions.
An investment advisor can help you understand different investment types, determine what types of investments suit your financial goals, and what level of risk is appropriate for you.
Here are some resources that offer further information related to crypto-assets:
- Things to Consider When Investing in a Trend (InvestRight)
- Caution urged for Canadians investing with crypto-asset trading platforms (InvestRight)
- Investor Alert: Cryptocurrencies (InvestRight)
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.